Archive for the ‘Columnists’ Category

Dairy Financial Times: Fiscal fitness for your dairy

By Robert Burroughs

Three years ago, I was approaching 50 years of age, was horribly out of shape and overweight, and I knew that with my family’s history of heart problems, I could end up in a pine box in a very short period of time if I didn’t take some action to change my “situation.”

To make a long story short, in the last three years I have lost 55 pounds, made regular workouts a part of my lifestyle, changed my eating habits and as a result now am able to go backpacking in the Sierra Nevada, have climbed a 14,000 foot peak in Colorado, and have seen my blood tests reveal excellent heart health. For a 52 year old, I am fairly physically fit.

You’re probably thinking, “So what? What has that got to do with the dairy business in 2011?” Well, just like individuals need to assess their physical fitness, each dairy business needs to evaluate its own fiscal fitness, and then make a plan to get in better fiscal shape.

Getting in shape

So let’s take a look at the process of getting in shape. In my personal journey toward physical fitness, my first concern was cardio-vascular health, and in a business that equates to profitability.

Profits are very much like a healthy heart and lungs, because as long as the business is making money, it will be able to survive quite a long time, even if it has other problems. Keep in mind that because the dairy business is highly cyclical, we don’t look at only one year at a time, but at a three to five year period.

If your dairy has not shown fairly significant average profits over the last five years, then just like I started on a controlled diet and training on a stair-climber to lose weight and get my cardio-vascular system in shape, you need to make the changes necessary to become profitable.

Most dairymen have already “gone on a diet” so to speak, and have done all they can think of to cut their expenses and make their operation more efficient. While that doesn’t mean that there aren’t ways to do more with less, I am not going to spend a lot time in this article talking about how to cut costs. We are going to talk about the next phase of fiscal fitness.

Shaping up the balance sheet

As important as profitability is, we also need to understand how to shape up your balance sheet. You can have good profitability but if you don’t use it correctly, you can still end up with a bad balance sheet. Just like I started lifting weights and doing strength training workouts in order to increase muscle mass and re-shape my body, each dairy business has to think about the “shape” of their balance sheet. Does it have the right proportions, and is it in condition to handle whatever stresses may come?

We all know what a great body looks like, but what does it take to have a well proportioned balance sheet? The most important measurement may be overall debt to equity, which measures how many dollars of debt are serviced by each dollar of equity? But the measurement I want to address here is the current ratio and the related concept of working capital.

The current ratio is calculated by dividing current assets by current liabilities, and working capital is the difference between the two. Current assets consist of cash, receivables, feed inventories, investment in growing crops, and prepaid expenses. Current liabilities are made up of accounts payable for feed and other trade expenses, accrued interest and other accrued expenses, and feed loans or other loans due within one year.

You would like your current ratio to be at least 1.25 (although some lenders these days want it to be 1.5 or higher). A current ratio of 1.5 means you have $150 of current assets for every $100 of current liabilities. The higher the ratio, the more working capital you have, and the better you will be able to handle times when cash flow is negative.

The losses that everyone in the dairy business incurred in 2009 put a huge dent in everyone’s working capital, and although 2010 was much better, it did not go very far toward replacing that lost working capital. We are seeing many, many clients with negative working capital on their financial statements, and that can be very problematic for their lenders.

How do you improve a bad current ratio?    In the first half of 2011, dairymen should see positive cash flows, but if you use that cash to pay down long term loans, such as cow loans or real estate loans, or if you use the cash to build more freestall barns or buy more cows,  you will not improve your fiscal attractiveness. Those dairies with low working capital need to take advantage of the current high milk prices and the resulting cash flow and use it to pay down old payables or feed loans.  You also may be able to restructure your balance sheet, by paying off short term loans with long term borrowing.

If you have significant equity in cows or real estate, it may be possible to borrow against them to reduce your short term debt.  Also, if you have any long term assets, such as notes receivable or other investments, which are not generating significant returns, you might consider liquidating them and using the proceeds to pay off short term debt.  Be careful with this, as you may trigger tax liabilities in the process, so make sure you talk to your accountant before you make this kind of move.

Every dairyman needs to know

Fiscal fitness is imperative in these times of roller coaster milk prices and skyrocketing feed costs. Every dairyman needs to know what kind of shape his balance sheet is in, and how to make it better. The quickest way to shape up is to take advantage of these periods of positive cash flows to pay down payables and feed loans as rapidly as possible. Investments in long term assets should be carefully thought-out and financed appropriately, so the current ratio is not negatively impacted. At the risk of over simplification, a balance sheet looks best when it is heavy on current assets, light on current liabilities and heavy on long term debt and equity.

 

FYI

Robert Burroughs, CPA, and partner in Modesto, Calif., with Genske, Mulder & Co., LLP, a certified public accounting firm representing clients who produce 12% of the nation’s milk in 29 states. He can be reached at 209-523-3573 or robert@genskemulderco.com.

 

People Power: Strategy in turbulent times

By Robert Milligan

Three years ago, none of us could have imagined what would transpire in our dairy and agricultural industry, or in the general economy. I have been referring to this as TURBULENCE X TURBULENCE.

Since there is no indication either the dairy or general economy will return to anything approaching stability, it’s important we consider whether these changes mean we should view strategy differently. I think the answer is “yes.”

Some experts say we are in a “new normal”  characterized by three words: uncertainty, volatility and risk. I would argue the “new normal” is that there is no normal. Based on  current turbulence and the increasing diverse factors facing every dairy business, it is absolutely essential each business develop its own unique strategy.

Uncertainty, risk and volatility: These three words are too much alike and paint far too negative an image of the future. They have very different statistical properties, but refer to a similar idea.

Think about the three words you would use to describe our turbulent future. The three words I choose are: Change, urgency and opportunity. My suggested approach to developing strategy using those words in turbulent times is captured in this formula:

Embrace Change + True Urgency = Opportunity.

 

Embrace change

Our tendency is to think change is something we respond to. That view of change is a reactive response. To thrive in turbulent times, we must view change more proactively –  embrace it.

The proactive view of change should be applied both to how we view change external to our dairy business; and to change internal to our business.

The surprising conclusion of those who research change is we, as human beings, have only two patterns for response to change:

1) We perceive the change to be a loss.

2) We view the change as an opportunity.


Without going into detail about the patterns, we can easily conclude, whether as owners or employees, perceiving change as opportunity is preferred.

As business leaders, we are the ones to set the tone for everyone in our business. If we embrace change and believe it will create business opportunities, our partners and employees will be much more likely to view changes we introduce as opportunities.

What then, besides setting an example, can we do to increase the likelihood others will view the changes we initiate as opportunity:

• Involvement: The more we are involved in planning the change, the more likely it will be viewed as opportunity. Do not spring change on your employees. At minimum, provide them with a preview by seeking their ideas for improving your plans prior to finalizing everything.

• Control: The more we view that we are in control of our responsibilities and success, the more likely we will view change as opportunity. Be certain everyone understands why the change is important, and that they will be provided the training, support and coaching needed to succeed after the change.

 

True Urgency

John Kotter, world renowned change expert, argues (in an insightful book titled A Sense of Urgency) that successful change starts with a sense of urgency. The problem is most businesses facing financial pressure have either complacency or a false sense of urgency.

True urgency, both in Dr. Kotter’s and my experience, is rare, but feasible. Review the signs of complacency, false urgency and true urgency in the table below.

Dairy businesses wishing to develop a true urgency culture must first clearly identify what is important – mission, values, strategies, objectives and goals – and then focus on them every minute of every day. The phrase “relentlessly purging the irrelevant” has resonated with managers learning about strategy in turbulent times.

Two ways to quickly begin moving toward true urgency are: 1) show urgency yourself by focusing everything on the important; and 2) lead by example by always setting and meeting deadlines and commitments.

Remember: Embrace Change + True Urgency = Opportunity.

FYI

Robert Milligan, senior consultant with Dairy Strategies LLC, can be reached via phone: 651-647-0495; e-mail: rmilligan@trsmith.com, or website: www.dairystrategies.com.

 

Review the signs of complacency, false urgency and true urgency

Even God can’t hit a 1-iron

USDA’s Dairy Advisory Committee gave it a shot

By Dave Natzke

Several years ago at a gathering – mainly of dairy farmers and ag engineers, so it must have had to do with manure – a debate arose.

One faction argued that God must be an electrical engineer, given His role in designing the human brain and nervous system.

Another faction argued that, in witness of the human heart and circulatory system at work, God must be a mechanical engineer.

A third faction, however, contended The Almighty was a civil engineer, because only a civil engineer would run a liquid waste disposal system through a perfectly good recreational area. I’ll pause while you meditate on that one.

One thing missing from this story was that nobody argued God was a social engineer, probably for good reason. Social engineering seems to be a human creation, and with all the layers of committees, commissions, governments and courts, we have certainly complicated the process, if not perfected the system.

So despite all His engineering prowess, there is general consensus there are a couple of things God can’t do. First, in a widely held notion publicly expressed by golfing legend Lee Trevino, even God couldn’t hit a 1-iron. Second, under the realm of social engineering, it’s apparent even God couldn’t develop congregational unity on federal dairy policy. It’s an area He wisely stayed out of because, after all, it’s not as simple as parting the sea.

Imagine, then, the wilderness USDA’s Dairy Industry Advisory Committee (DIAC) wandered into, guided by the staff of history and a few dairy economists and policy experts. Seventeen tribal leaders and a multitude of hosts, forevermore arguing … but I digress.

Anyway, in substantially less time than it took to cross a desert, DIAC emerged on the other side. Whether they reached the Promised Land is open to interpretation. However, they have reached the doorstep of U.S. ag secretary Tom Vilsack’s office with a list of 23 items (give or take one slightly controversial issue) – presumably contained on at least four stone tablets or one slightly lengthy PowerPoint presentation, and an Adobe pdf document with supporting materials.

DIAC members voted on their final recommendations on March 5.

Nothing contained in the final recommendations is especially flashy. Many items found nearly unanimous agreement among those who ventured up this mountain. Some suggest doing away with ideas created by former dairy scribes. Some are a testament to new thinking, as the world is now again considered “flat.”

Those receiving the greatest agreement were more or less guidelines, and the Devil (you knew he’d make an appearance, right?) will be in the detail.

They included:

• recommending a review of federal milk marketing orders; simplified and improved risk management products;

• improvements in federal loan programs;

• development of triggers and actions for emergency intervention;

• explore eliminating the dairy product price support program and dairy export incentive program;

• elimination of end-product pricing;

• better collection and publication of competitive pay prices;

• development of risk management margin lines of credit;

• modification of the Milk Income Loss Contract program, and providing a margin insurance option;

• creation of special tax-deferred dairy farmer savings accounts;

• support of competitive markets through oversight by the Federal Trade Commission and Department of Justice;

• maintaining and expanding programs for export market development;

• support the reduction of the somatic cell count standards to 400,000 cells per milliliter;

• encouraging USDA to explore impacts of California-type fluid milk fortification standards;

• restrictions on use of dairy terms when labeling products not made from dairy;

• development of educational programs and technical assistance to accommodate unique value-added dairies;

• increase funds available for environmental practices;

• continue the Environmental Quality Improvement Program (EQIP) and grant programs for energy audits, infrastructure development for value-added processing and distribution, among others;

• a phaseout of ethanol subsidies;

• creation of a dairy herd health program to eradicate bovine tuberculosis and Johne’s disease; and provide a legal means for dairy farms to employ year-round, long-term immigrant labor.

Less consensus, or rather a downright split, regarded adoption of a growth (or supply) management program.

Some of the recommendations will run directly counter to other federal policies. Smoothing the terrain for immigrant labor, for example, is a hot potato facing opposition from Homeland Security and other border protectors. Ethanol subsidies have support from energy security advocates and crop producers. Federal funding for export market development, as well as many conservation programs, already face the budget ax. And, any program will have to face the abacus of budget scoring.

We’ll see how they’re received, and how they’ll fair alongside other dairy policy engineering efforts from the likes of the International Dairy Foods Association, National Milk Producers Federation, Dairy Policy Action Coalition, National Dairy Producers Organization, and many others. Then, there’s the little matter of taking it to the temple of Congress.

It’s highly unlikely DIAC’s delivery on the steps of USDA will contain all things necessary for communal living in the dairy industry. We do, after all, have quite a large number of replacement heifers in need of care – literally and figuratively. However, it was a noble effort and undoubtedly a guide for the future.

So, did you hear about the time Moses and Jesus skipped a breakout session during an Old Testament Conference to go golfing? Eyeing up a rather lengthy second shot on a par five hole, Jesus asked for his 1-iron, to which his caddy, Peter, denying his request, replied, “Even God …

FYI

■ To offer your own opinion or response, e-mail Dave Natzke, national editorial director, DairyBusiness Communications, e-mail: dnatzke@dairybusiness.com.


Human Resources: Parlor efficiency

Many factors impact benchmarks and goals

By Felix Soriano

Felix Soriano is a labor management and human resource consultant with APN Consulting LLC, Warrington, Pa.

 

How do you measure parlor efficiency? Does having less milkers means my parlor is more labor efficient? Am I paying too much to my milkers and that makes my parlor labor efficiency poor?

These are some of the questions I usually get from clients looking to improve parlor performance and efficiency.

Last year, I surveyed six dairies where I did parlor audits and milker training schools, and evaluated parlor efficiency. All six had fairly modern parallel or herringbone parlors and varied in cow numbers from 380 to 3,000. Most of the dairies were located in the Northeast (Pennsylvania, New York and Vermont), with one in New Mexico.

Soriano surveyed six dairies where he did parlor audits and milker training schools, and evaluated parlor efficiency.

From this survey and personal experience, I believe there are three factors affecting parlor efficiency the most. Of the three, only one has to do with labor. These main factors are:

• Cow numbers. The more cows that need to be milked, the more diluted parlor operating costs will be.

• Average milk production per cow. As shown in survey, the higher the individual milk production, the more we can reduce labor cost per cwt.

• Milking speed. This is the one labor-related factor. By constantly working and training milkers at the dairy we can have a positive impact on parlor efficiency.

Let’s pay particular attention to this last point. The bottom line is how fast can we get cows milked, and the best way to keep track of this parameter is by monitoring

• cows/hour or turns/hour

• number of cows milked/milker per hour

Dairies with the highest number of cows milked per milker per hour were the most labor efficient. We can see from this data that the most efficient dairy is the one from New Mexico, with only 22¢/cwt. labor cost, followed by one of the New York dairies, with a 47¢/cwt. labor cost.

For any of these parameters, it’s important to set up your own benchmarks and goals according to the type and size of your parlor. Geographical area, weather conditions and other factors will have an impact.

However, don’t focus only on milking speed. Milking quality, attention to the cows while milking, and adequate udder prepping and milking routine are crucial to the success of your milking program as well.

What should be monitored when it comes to parlor efficiency? The two parameters I suggest monthly monitoring are:

1) Labor cost per cwt. It’s hard to compare large Western dairies to dairies in the Northeast because of cow numbers. However, it is important to define your own goals based on where your dairy stands today. Some dairies in the Northeast have been able to obtain numbers under 50¢/cwt. of labor cost throughout 2010. It’s not about salary, but most importantly how many cows can each milker milk in 1 hour. A reasonable target in some dairies with a full milking routine could be between 70-75 cows per milker per hour. In dairies with minimal prepping procedures, targeting around 140-150 cows per milker per hour wouldn’t be unreasonable.

2) Pounds of milk per stall per hour. This is an excellent parameter to evaluate parlor efficiency. Once again, base your benchmarks and goals according to your herd size, type of parlor and individual milk production per cow.

Finally, push your milkers to keep a fast pace while in the parlor. However, always remember that it’s important to have a good balance between speed and work quality.

This balance may differ according to location of the dairy. Due to climate, a dairy in New Mexico may have less environmental-related health problems than a dairy in Pennsylvania or Florida. The type of facilities, stalls and bedding are important when it comes to defining the right milking routine and milking pace expected by your milkers. Also, expected employee turnover rate can be important when defining those goals.

Consider all these factors when establishing your own milking program and setting parlor efficiency goals. Always discuss them with your veterinarian and external consultant.

FYI

Felix Soriano is a labor management and human resource consultant with APN Consulting LLC, Warrington, Pa. Contact him via phone: 215-738-9130, e-mail: felix@apndairy.com or visit www.apndairy.com.

People Power: Performance feedback — Use the ‘5 Whys’

By Robert Milligan

This month we resume our look at feedback related to inadequate performance, starting with questions.

1) How do we find the root cause of inadequate performance?

When we experience inadequate performance or unacceptable behavior, a small (or sometimes loud) voice asks, “What punishment does he or she deserve?” This is the wrong question, because we have not yet determined the reason. The appropriate question is “What is the cause?”

Too often, we treat symptoms, not the real problem. A great, but simple, tool to get beyond the symptoms is the “5 Whys.”

For a problem – for example, low milk production, high SCC, inadequate employee performance – keep asking “Why?” until the answer:

• is definitely not a symptom

• identifies something – usually involving people – that can be changed to likely solve the problem.

The process is called “5 Whys” because the root cause will almost always be identified with five or less repetitions of asking “Why?” (For an example worksheet, e-mail: rmilligan@trsmith.com.)

2) What is the suggested process for providing redirection feedback?

Our human tendency to blame others when performance or behavior does not meet our expectations is dangerous and potentially damaging in situations where redirection is the appropriate type of feedback. Redirection feedback is appropriate when the unacceptable performance is determined to be caused by the situation – not by the employee’s lack of motivation or focus. Any action that states, hints or even implies blame will be seen as unfair.

Redirection feedback is difficult to deliver, because the employee is already on emotional alert, both because of the failure to meet the expectation, and an anticipation that they will be unfairly blamed.

Four-step process to redirection

Use the following four-step process to deliver redirection feedback:

Step 1: Prepare for the discussion by identifying (from your perspective) the causes for failure to meet expectations, and what must change to meet expectations. The “5 Whys” approach can be used here.

Step 2: Gain the employee’s perspective on the behavior or performance that has not met expectations. Listen and ask questions as appropriate. Together you could complete or expand on what you have done with “5 Whys”.

Step 3: Based on the discussion, modify your ideas for what must change, and discuss those changes with the employee. You must be certain the employee understands:

• the failed expectations was not their fault

• change is required

• you will work with them – training, coaching, supporting – so they can succeed.

Step 4: Work with the employee to establish a realistic plan, goals and timeline to meet and exceed the expectations

Let’s apply this redirection feedback to the following example: The expectation for the dairy feeder is to complete morning feeding of the milking cow groups by 10 a.m. Fulfilling this expectation has been problematic, getting  worse with additional computerized technology that should assist with both accuracy and speed.

Following the four steps above:

Step 1: The supervisor observes the feeder appears to lack the confidence required to do the job quickly and correctly. Additional  requirements to use the new computerized technology seem to confuse him, despite what you thought was sufficient training.

Step 2: Although the feeder seems very worried as you sit down, his engagement in the conversation increases as he sees you are interested in helping him succeed. Together you complete a “5 Whys” worksheet and confirm he is not yet comfortable with the new technology, and also that changes in herd health have created a backup for the feeder.

Step 3: Together, you decide additional training is needed and the feeding sequence must be adjusted. You also realize increased high-quality positive feedback will increase the feeder’s self-confidence.

Step 4: Together you commit to a training and coaching plan and develop a new feeding sequence. You commit to additional positive feedback.

3) What is the suggested process for providing negative feedback?

When redirection feedback does not result in improved performance, you are left to conclude it’s the employee’s motivation, focus, or concentration, and negative feedback is required. The process for negative feedback is similar, but recognizes the situation is not the cause of the performance problem:

Step 1: Prepare for the discussion by identifying (from your perspective) employee behaviors – motivation, focus or energy – that are lacking, and identify potential consequences if  poor performance continues.

Step 2: Gain the employee’s perspective on the behavior not meeting  expectations. Listen and ask appropriate questions. Unless you hear something that causes you to reconsider the need for negative feedback, do not acquiesce to the employees attempts to blame the situation.

Step 3: Based on the discussion, modify  your ideas on what is causing the poor performance. Provide the employee with a choice to: 1) change his or her behavior resulting in satisfactory performance; or 2) incur the consequence you are specifying. The consequence must provide sufficient discomfort to the employee to cause a change in behavior. You must be certain the employee understands:

• the failed expectations cannot be explained by the situation

• change in their behavior is required

• you will work with them so they can succeed.

Step 4: Establish a realistic goal for improvement and a timeline to meet this goal. If the goal is not met, the consequence will be implemented.

FYI

Robert
Milligan
, senior consultant with Dairy Strategies LLC, can be reached via phone: 651-647-0495; e-mail:
rmilligan@trsmith.com, or website: www.dairystrategies.com.

On the Edge of Common Sense: Food safety act

By Baxter Black, DVM

What will the Food Safety Modernization Act, if put into effect, do to Ms. Obama’s backyard garden? Congress has taken up the issue of food safety because of the headline-grabbing occurrences of, primarily bacterial, outbreaks of disease in fresh meat and produce. With the exception of eggs, most E. coli and Salmonella outbreaks are a result of human or animal contamination in the growing or processing of the product.  This is the reason that organically grown produce is especially vulnerable. Unable to use chemical fertilizer, pesticides, or insecticides, organic growers must make an extra effort to reduce organisms carried by using manure fertilizer, invasive insects and vermin.

I have a garden. I battle many of tomato’s natural adversaries! I appreciate how difficult it must be for a gardener to ward off the tomato worms, hungry caterpillars, beetles, grasshoppers, bugs, birds and rodents by hand, to keep it “organic.” I use early season Sevin and pyrethrums because I’m lazy, I guess, or just don’t have the time. Besides, I get healthier tomatoes and more of them.

So what would the Food Safety bill have to do with Ms. Obama’s garden? Would she be allowed to take her tomatoes, lettuce and celery down to the Saturday morning Farmer’s Market? Or serve them in a salad to guests of the White House? I expect the bill would limit her options. An FDA spokesman said the Food Safety bill could actually “kill the very farmers they are trying to help.”

Amendments that place lesser restrictions on smaller producers have been discussed to reduce their paperwork burden. But, does that make the product safer than blueberries from Chile and avocados from Mexico? I don’t think so.  Congress is trying to avoid eliminating the availability of home-grown fresh meat and produce to consumers with the new law. Sometimes politics enters in and skews the science. Some amendments discussed even want to inflict laws based on where the food is sold or how much the farmer earns, which has nothing to do with food safety!

Under the Food Safety bill, will local co-ops, local producers, and Ms. Obama be required to place warning labels on their radishes and zucchini? If she serves it to the French Ambassador will she have to give a short announcement at the table like a flight attendant, “Ladies and Gentlemen, Joe and I will be serving you this afternoon, please give us your attention. Eating of the legally unrestricted fresh food in front of you, none of which has been grown or processed or approved by the Food Safety Act, can result in distention, nausea and uncontrollable evacuation. Eat at our own risk. This room has several exits, please take note of the one nearest you. In case of a universal attack, emesis bags will fall from the ceiling…”

All of us in agriculture are concerned with these food-carried, usually ‘operator error,’ disease outbreaks, whether it stems from a packing-plant contamination of ground beef, field contamination by fruit pickers, or fertilizer contaminated home-grown cabbage. However, regardless of any laws passed, the risk of eating fresh food will always be there.  In the future I can envision genetically modified foods or antibiotics that will resist, contain, or even prevent bacterial or fungal contamination in the growing process, and someday the government will get wise and require irradiation of fresh meat and produce that is marketed to the public.  But, for now, I will continue to grow my tomatoes and jalapeños, and I wouldn’t be afraid to eat out of Ms. Obama’s garden either. It’s hard to beat home-grown!

 

FYI

Baxter Black is a cowboy poet and ex-veterinarian raised in New Mexico and now lives in Benson, Ariz. He has written 12 books and recorded more than a dozen audio and video tapes, and is a syndicated columnist and radio commentator. Books, videos, CDs and tapes by Baxter Black can be purchased through www.baxterblack. com.

 

Milk Matters: Product innovation a strategy to boost demand

By Dr. Joseph O’Donnell

Like many of you, I came back from the World Ag Expo in Tulare inspired and full of new ideas. Everyone likes to see innovative new products whether new food products or new farm equipment, new technology, new features, new advantages – innovation is always exciting. It is clear to me that milk producers and processors alike appreciate innovation and understand the importance of keeping competitive in the food marketplace. That means constantly introducing innovative new products or discovering new benefits of existing products.

Sometimes we promote the newly discovered nutritional benefits of new dairy products; sometimes we position innovative products designed for today’s culinary advances; often we have products that are used as ingredients in other manufactured foods such as texturing proteins for meat products or cheeses that deliver a new taste sensation to consumers not familiar with something like pizza (as in China). The world keeps moving forward and so must dairy product development. What is less understood by our own industry is the process by which a new product sees the light of day.

Product development is a continuous process that starts with generic, fundamental information and gradually works its way into becoming more and more a proprietary product sold by a manufacturer in a competitive environment. The process starts with the milk producer. Producers market raw milk – no brand. The truck comes and takes the milk away. While all producers do not compete with each other for the market, the condition of the market itself does influence all producers. Pricing formulas lie way beyond the understanding of this scientist but I do know that the old supply/demand ration is a major factor. One way to increase the demand side of the equation is to increase the variety of dairy products attractive and available to consumers either as retail products, foodservice products or dairy ingredients in food products (bakery, sports beverages, infant formulas, etc.).

Consumers have ever-changing needs and desires. Our non-dairy competition nimbly reacts to these changes. In order to keep up in the market, our dairy product development work can never rest. If product development does its job, the producer sees increased demand for raw milk but how can the milk producer possibly influence product development?

Just as producing milk is a mostly generic process so is the generation of the fundamental research necessary to start the ball rolling. For example, working out the structure of complex milk fats or proteins or finding new concepts to support the nutritional value of milk products are all things that benefit the entire industry – globally. It is riskier since you really don’t have a finished product in mind. That is the nature of innovation. What you do have is confidence in your product and in your researchers. It may take some time before all the feasibility studies and variables are worked out. Universities excel at this kind of research. The costs are kept modest because universities are usually state supported thus faculty salaries are covered; the infrastructure established; and they are not-for-profit. This is where many of the great advances in the world spring forth. Going to the moon started in basic science laboratories. That antibiotic that saved your life started in a basic science lab. In the case of dairy food research, the scientific data are published and product developers from anywhere can access and move forward with product innovation.

The milk processor buys raw milk and converts it to a finished product. In the end, the processor is selling a competitive product. The pricing is competitive, the quality is competitive, the application is competitive, and it’s all competitive, not only with other dairy manufacturers and products but also with non-dairy products.

Maintaining a research and development laboratory is expensive. The product developers working in these labs consult with the marketing departments to transform ever-evolving university research into new products that meet the constantly changing consumer needs. This is all done at significant cost to processors with an end goal of putting a constant flow of new products on the consumers’ table and, at the same time, fuel demand all the way back to the raw milk.

Because data on the sales of these new products are proprietary, it is difficult to assign a true value to the basic research that started it all. This is why the not-for-profit dairy associations that interface with both producers and processors are critically important. A trust factor is essential so the work on basic research will relate to the needs of the product developers in those R&D labs. Once that network is established then the engine runs. It’s all about intelligent communication and innovation.

In summary, we have producers all responsible for the same raw product and dependent on market demand to move it along with processors trying to out-compete other dairy or non-dairy processors. Both milk producers and processors depend on the entire product development process in order to expand their markets and increase demand for their dairy products. As a nutritionist, I believe the more dairy products our industry can deliver to the global market, the healthier the world will be. That delivery depends on developing the proper products as much as any other factors, including price.

I have left out a lot of steps but the point I am trying to make is that producers, processors and the ever-important consumers all benefit from research. In fact, quality of life and even corporate survival depend on it. New products are constantly in the pipeline; consumption of milk products lies in the balance. Innovation has always been a defining characteristic of the American psyche. Innovation happens when our industry works together, believes in our products and is committed to contributing to the health of our nation by delivering the finest products made from the greatest food nature has created.

FYI

Dr. Joseph O’Donnell is executive director of the California Dairy Research Foundation. He can be reached at 530-753-0681.

Information on the California Dairy Research Foundation can be obtained from the organization’s web site at www.cdrf.org.

Success Strategies: Think like a rock star

By John Ellsworth

The difficulty lies not so much in developing new ideas as in escaping from the old ones.”

~John Maynard Keynes, Economist


Think about the title of this article for just a moment. I imagine that you are wondering where I am going with this line of thought… Well, I recently saw a quote from the star musician Madonna that said, “I spot a trend and then I get ahead of it.” Whether you are a huge fan of Madonna or not, you have to admit that she has done a fantastic job of re-creating her image over the last 20 years to continually stay on the leading edge of her industry. Have you?

Pursuing positive projects?

When your banker comes to your dairy operation once or twice a year, is he or she impressed with some of the new projects in which you are involved. Speaking from my prior experience as a lender, I was always excited to hear about the positive items that my customers were pursuing. After all, the bank likely plays a key role in ensuring your growth and success. So, how do we get to the point of being able to stay on the leading edge of change in our industry?

Initially, I believe the process requires that you attempt to identify the changes that are occurring around us. What are these top five variables that are moving in new directions? Please remember that they can be somewhat different for each dairy operation, but it is more likely that they really are only different in the actual impact they have.

For example, a drop in milk prices will certainly impact an operation that is highly leveraged more than one with little or no debt. However, these changes are still occurring for all of us. They are just like the law of gravity. You can jump off the 10th story of a building and exclaim, “I don’t believe in gravity,” all the way to the ground, but it won’t change the final outcome, or the impact of gravitational forces!

What are the most important trends and how do they impact your dairy?

Here are a few to consider:

1.) Feed Prices in the future – Where will they be headed over the next 3, 6 and 12 months? How about over the next five years? Most important, what will the impact of this be on your operation and how do you plan for a more successful outcome?

2.) Short Term Milk Prices – They are clearly trending upward as I write this article, but how do you take advantage of this trend? Should you lock prices in now or at some date in the near future?

3.) Long Term Milk Prices – How do you ensure that the consumer gets a great product at a reasonable price, but not while watching you go broke? Given those two factors, which are somewhat in conflict with each other, should you join a coalition of dairy producers such as the National Dairy Producers Organization? Yes!

4.) Future Financing – This is an area of great concern to me. Will lenders be there for producers in the future? Following the financial fallout of 2008, they have been overburdened with the “great government fix,” characterized by excessive regulation and bank auditors who believe the entire world revolves around them… Regardless, what will these trends in financing mean to your business? Now is the time to think about it, not three years from now when you and entire industry may have their backs “against the wall” financially.

5.) Interest Rates – In the event that you are able to borrow money in the future, and I do believe that you will be able to, what are the trends and the factors that affect interest rates? How can you capitalize on these?

6.) Environmental Issues – What is the next set of regulations that could surface? Are you prepared for them? Can you afford them? Ignore them at your own peril. Doesn’t it make sense to be thinking about what they might be?

Moving forward

As you move forward in your business, think back to some of the trends in the past that you have taken advantage of. What were they and how do you capitalize on them? For you to continue to succeed, what new trends do you need to recognize? How can you stay “ahead of the curve” with them? What are your most successful colleagues or neighbors doing? Remember, you don’t have to have all of the answers to these questions. You just need to take the time to think about them and if you cannot figure one of them out, talk to others who can or who already have.

If I can help you as you think about developing a better future, please let me know or visit my website at www.success-strategies.com and look at our free Success Tips and Videos sections. Either way, please set aside some time to consider these trends. What’s next? It’s your move.

FYI

John Ellsworth of Modesto, Calif., is a consultant with the financial and strategic consulting firm Success Strategies. He can be reached at 209-988-8960, or by e-mail: john@success-strategies.com.

Accounting for Profits: Start 2011 tax planning now!

By David Bekedam

It’s never too early to start planning the management of your 2011 taxable income.  In December of 2010, Congress passed a two year extension of the Bush-Era tax cuts giving guidance for 2011 and 2012 and providing an opportunity to take advantage of lower tax brackets and favorable capital gains rates.

Hopefully your 2010 tax returns were completed without any surprises. While 2010 was a much better year income wise than 2009, many dairymen used their free cash flow to catch up on payables and pay down bank debt. With good demand worldwide for dairy products, prices are expected to stay strong this year. Managing your taxable income will be crucial.

Farmers – a privileged group

In regards to the tax code, farmers are a privileged group granted the unique ability to legally prepay expenses and defer income. Because of this, many farmers at the end of the year, even in bad years, may find themselves with an unexpected large amount of taxable income to deal with. Over the next couple of years, managing these deferrals will become increasingly important. This is not only due to the fact that tax rates are expected to increase in 2013, but also due to the availability of credit, i.e. prepay and deferral loans.

So what can we do to manage taxable income to keep deferrals from snow balling?  Let’s start with a discussion about long term capital gains. Many dairymen choose not to pay any tax at the end of the year. Therefore, they prepay or defer enough to get taxable income to zero. Long term capital gains rates, the rate you pay on the majority of your cull cow income, is set at 15% for the next two years, scheduled to go to 20% in 2013. Deferring out of this income not only precludes you from taking advantage of this low rate, it also consumes funds that could be used in the following year to pay down income that could be taxed at effective rates above 40%.

Carry forwards

Many of you may have large net operating loss carry forwards going into 2011. It may be to your advantage to make use of these as well. Tax rates on Self Employment income have been lowered for 2011. The employee portion of the OASDI tax has gone from 6.2% to 4.2% (employer portion remains at 6.2%). This means on the first $106,800 of income you will pay 10.4% instead of 12.4%. Keep in mind the Medicare portion of the tax remains at 2.9% on all S/E income. Depending on the amount of your NOL carry forwards, you may be able to offset the rest of your taxable income by using them. Do consult your tax advisor on using NOL’s as there may be limitations on their use resulting from the new farm bill and for state purposes such as in California.

Bonus depreciation increased

Last, but definitely not least, the 2010 Tax Relief Act increases the 50% bonus depreciation to 100% for qualifying new fixed asset purchases in 2011. For assets purchased and placed in service from January 1, 2012 through Dec. 31, 2013, the bonus amount reverts back to 50%. Bonus depreciation provides a couple advantages over Section 179 expensing.  There are no investment or income limitations using bonus depreciation. Section 179 expensing for 2011 is limited in amount to $500,000 and begins phasing out when investments exceed $2,000,000.  In 2012, these amounts adjust to $125,000 and phase outs begin when investments exceed $500,000.  Bonus depreciation, as opposed to Section 179, can also be used to create a loss if needed to offset income from other sources. Allowable Section 179 expensing amounts for states do not always conform to federal and will vary from state to state.

Cash flow impact

When taking advantage of bonus and Section 179 depreciation on new assets, be sure to first consider the necessity of your purchase and how it may affect your cash flow. There are still opportunities to take advantage of favorable financing on equipment purchases. Make certain that your bank concurs with the reasons these purchases are necessary and their effects on free cash flow that might otherwise be used to improve your position with the bank.

While we can all breath a sigh of relief for now that congress has decided to keep tax rates from reverting back to increased amounts, they won’t stay at these levels forever. The extensions are set to expire Jan. 1, 2013, not surprising right at the end of the next presidential election. Use the time given in the next two years wisely.

Talk to banker and CPA

Take advantage of lower rates by budgeting and managing to pay tax at lower rates. Make sure your bank is willing to advance the funds necessary at the end of the year to allow you to manage your taxable income and consult with your CPA for tax planning to avoid any unpleasant surprises that may have escaped consideration.

FYI

David Bekedam, CPA, senior manager, Moore Stephens Wurth Frazer and Torbet, LLP, in Visalia, Calif. Contact him by e-mail at: dbekedam@mswft.com or call, 559-732-4135 Ext. 120.

‘The family that meets together…’

It’s your money

by Verlyn de Wit

Here’s the scene: The family (some more bereaved than others) gathers in the attorney’s walnut-paneled conference room. Hopeful, nervous heirs whisper as they wait for the reading of the will. Tension reigns as the secrets of the brittle, sacred document are disrobed under bright lights.

This drama may be must-see TV, but it’s a terrible way to run a family!

A high value on harmony

I’m blessed to have a clientele which places an extremely high value on family harmony. To the wise ones, it’s more important than taxes (in spite of our pledge to pay the minimum tax and not a guilder more). It would be unthinkable for these fine folks to leave children in the lurch on such an important issue.

Fewer wills/trusts are distributing property “to the kids in equal shares” simply because today’s young dairy operator needs a massive capital base to have a viable operation. (See insert) Children are often treated differently, albeit fairly, in a well-planned estate. Some heirs may benefit from an irrevocable life insurance trust while others become part of a family limited partnership. As estate plans move away from “equal shares” to something more complex it becomes prudent to explain the plan to the kids.

Old rivalries rekindled

Family harmony suffers when kids realize they are treated differently and don’t know why. Old rivalries and jealousies are rekindled. Since mom and dad are gone now, a child can only speculate why he/she wasn’t treated like another sibling.

A professionally crafted plan, rising out of intense love for all the kids may create a family relationship disaster if it is not properly explained. Talking about your plan with the kids it isn’t easy, so I’m urging you to consider a formal family meeting.

Guidelines good to follow

The following guidelines have worked well for me in conducting family meetings:

• Parents should have their basic plan in place before staging the event. You may want to ask for input, but I wouldn’t recommend it.  This is the stuff over which you are the steward.  The purpose of the meeting is to explain what you’ve decided to do and why.

• Have one of your professionals (attorney, accountant, financial consultant) lead the discussion. Your plan will have more credibility when it comes from the lips of a professional.  Besides, you may be a little sketchy on some plan details. Your kids may come up with questions you haven’t thought of, and the advisor should be able to answer those questions for you.

• Explain the plan in general concept only.  The numbers will change dramatically over time. Children should also understand that while the child who follows you in business may seem to be receiving more, he/she will also be vulnerable to greater risk.

• Involve your children in your charitable plans. Consider designating a percentage of your estate to the charities chosen by your children at the time of your death.

• What about the in-laws? These are the wild cards in every family. We are generally more willing to overlook the imperfections of our parents than those of our spouse’s parents.  Your sons-in-law and daughters-in-law are probably the same way. Take inventory of your family’s interpersonal chemistry before organizing your family meeting. I’ve had some families insist that all spouses attend, and others had just the immediate family present. One family meeting I conducted was without the parents present. There were eight children, all of them married, and they took their spouses along. However, the rule was that while the children sat at the kitchen table with me, the spouses had to sit in chairs around the outside of the room and couldn’t speak! It felt strange, but it worked.

Usually a happy event!

Get ready for some pleasant surprises!   Your children will appreciate your thoughtfulness. The family meeting is usually a happy, heart-warming event. I’ve heard many children tell their parents, “you don’t owe us anything – try to spend the money.” A family meeting won’t turn a greedy child into a philanthropist, but there is a good chance you’ll say, “I should have done this a long time ago.”

A final related note

The Tax Relief Act of 2010 signed by the President in December, along with our current depressed dairy values provides unprecedented planning opportunity for large estates. The planning strategies I wrote about in the January issue become significantly more powerful under the 2010 Act. Call or e-mail me if you would like a reprint.

FYI

Verlyn De Wit helps successful dairy producers make smart decisions about their money.  He can be reached toll-free at 1-888-468-1728 by e-mail at vdewit@sammonsrep.com or snail-mail at 1270 Eastside Dr., Sioux Center, IA  51250. Securities offered through Sammons Securities Co., LLC. 4261 Park Road, Ann Arbor, MI  48103. Member FINRA and SIPC.

Neither Western DairyBusiness nor Verlyn De Wit is qualified to offer legal or tax advice. Consult your attorney and/or tax professional for a qualified opinion regarding your personal situation.

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